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Choosing between fixed-income and market-linked investment avenues

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Sunil Dhawan, Economic Times, 20/6/2016, source: http://economictimes.indiatimes.com/your-money/choosing-between-fixed-income-and-market-linked-investment-avenues/tomorrowmakersshow/52829574.cms

As an investor, one always wishes for the best returns from investments without any risk of losing money. However, it is common knowledge that there doesn’t exist any such investment product. In reality, risk and returns are inversely related, i.e. with more risk come higher returns and vice versa.
The decision to choose between the two is fairly simple. For a goal that is still a few years away, the reason to take risk might still exist while for goals

that need attention within a few months or years, it could really be a risky venture.
For investors, the choice between fixed-income investments and market-linked investments becomes more pronounced when it comes to meeting goals. Let’s see what they are and how different investment avenues may be put to use while chasing goals.
Fixed-income investments: Interest-bearing investments such as bank fixed deposits, company deposits, post office small savings

products and bonds are popular among fixed-income investors. They come with a fixed return and a pre-decided maturity period. They, therefore, belong to the debt-asset class. According to Vivek Karwa, Certified Financial Planner, Investment Adviser & Portfolio Manager, "You should be investing in these only when the requirement is fixed and certain in the near future since you need a sure shot cash flow and can’t risk any volatility."

The principal amount invested is fairly safe in such products. They, however, fail to generate high real returns, i.e. returns adjusted to inflation are low in such fixed-income investments. For example, if the return generated from them is 7 per cent while inflation is 6 per cent, the real return will be around 1 per cent. At the most, such instruments help in preserving capital and providing a regular flow of funds to meet monthly household requirements.

Market-linked investments: When returns depend on the performance of the underlying asset, which could be equity or debt, it is the case of market-linked investment. Returns, therefore, are neither fixed nor assured. Equity shares, mutual funds, Ulips, NPS are all examples of market-linked investments. As they are high-risk products, the potential to generate high return is also there.

Role of market-linked investments: As fixed income investments generate low real returns, it is imperative for an investor to look at equities. Karwa says, "In case you are young and have no responsibilities in the near future and can afford risk taking, then investing in fixed income securities will not take you anywhere. Keep in mind that post taxation you may not even beat the inflation."

Market-linked investments, especially those made in equities as the underlying asset class, are more likely to deliver high real returns. For this to happen, the holding period of equity should be long enough to ease out the volatility associated with equity. The more away the goal to be achieved is, the more reliance can be placed on equity-backed investments. Karwa says,

"Every product has its own cycle with its underlying factors changing. Proper investing based on time cycle and risk can help you beat inflation and give you real growth. If you have a horizon of 3+ years, then go with market-linked products. You will surely require some expert advice here." Be it one’s child education, marriage or one’s own retirement, equity plays an important role in creating a decent corpus even with smaller amount of regular savings.

Taxation: While choosing an investment product, taxability of the specific investment is equally important. The interest income from most fixed-income investments such as bank deposits, post office time deposits, NSC, KVP and bonds is fully taxable as per the income tax slab of the individual. The post-tax return from them therefore is much less than what they offer. Although interest is taxable, the 5-year tax-saving bank fixed deposit and post office 5-year time deposit qualify for tax deduction under section 80C of the Income Tax Act, 1961. PPF and tax-free bonds yield tax-free return while the former also gets tax advantage under section 80C.

Equity-oriented investments such as equity mutual funds, Ulips and NPS are more tax-friendly. The gains after holding them for a longer duration are tax-free except in NPS wherein it is partially taxable. Equity-linked savings scheme (ELSS), a variant of equity mutual fund, provides exposure to equities, gives tax-exempt return and even helps in reducing one’s tax liability under section 80C. Ulips offer similar benefits and in addition, provide protection through life insurance.

Conclusion: For an investor chasing long-term goals, it is important to make the best use of both the worlds. Both fixed-income and market-linked investments have a role to plan in the process of wealth creation. While market-linked investments help in navigating the volatility and in the process generate high real return, the fixed income investments help in preserving the accumulated wealth so as to meet the desired goal. In times when interest rate is on the down side, choosing between fixed and market-linked investment avenues should not be so difficult.

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Few Words on Market…

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By Vivek Karwa, Certified Financial Planner^CM

We all entered into the year 2015 with many expectations and hopes of making handsome returns on our investments on back of stable and strong government at the centre. But many forgot that the numbers in the Rajya Sabha are tilted against the government. The sad part in our country is that politics is played in personal interest first and national interest comes only later. This applies to the whole system and not trying to single out any in particular.

Thus, with washout of two sessions of parliament it has become clear that the government cannot rush through major reforms till the number equation changes in the upper house. Until then the pace of reforms will be at a normal and hence we saw major correction in the market. Hence nothing big happened in the year 2015.

The year 2016 will surely be better than 2015. Investors should understand that when we enter markets we cannot expect wonders to happen within 12 or 18 months. Fair time period which we should give is 36 to 60 months. When it’s said 2016 should be better, it has reasons behind it.

The major two factors which will contribute to the positivity in the economy are slump in commodities prices and the crash in the crude prices. Out of all factors, I want to today touch in detail the Crude oil prices and the discussions people are having around the policy of the government towards the fuel prices.

Many people have been complaining that the #CrudeOil prices have fallen from almost levels of $100 to $37-40 today, yet the fuel prices have come down just around to Rs.65 from the earlier levels of Rs.77 approx. Though the petrol and diesel prices are down, they are not down proportionately to the crude oil prices.

Some people are furious on why government is not reducing the prices and why it wants to fleece consumers! This Notion is wrong and ill thought off.

1. Let’s firstly understand that India’s crude oil import bill is too big. Whenever we import something, we need to pay in dollars, so is the case with crude oil. With Rupee at 67 against the dollar we cannot afford to reduce our dollar balance, meaning Currency Reserves.

2. We need to understand that when the crude prices were going up, the government did not increase the prices in same proportion the way we want them to decrease now! The so called under recoveries were as high as Rs.12/- meaning we were being subsidised in big way, that made our Fiscal Deficit monstrous and at a point of time India faced a risk of sovereign downgrade.

3. Crude oil price correction is helping the government in improving the fiscal situation.

4. Government will collect almost Rs.1 Lac crore from the additional excise duty hikes we have seen in the fuel prices.

5. Corporate sector is already facing huge debt pressures and will not be able to spur growth by way of capital expenditure! They just don’t have the money. It is government which will have to announce and award various projects and start the spending. This money collected from additional excise duties will help. Economy will recover in the process. Government is in fact already active in spending.

6. The fuel prices cannot be allowed to come down freely for more logical reasons, just assume the petrol prices are cut to Rs.30/- what can happen?

a. Crude oil prices are unpredictable! Assume they suddenly shoot to $50, will there not be a social unrest if the prices of petrol and diesel are suddenly doubled? Hence better to keep them in stable price range by way of increase/decrease in taxes.

b. In today’s situation if the crude prices go up, government can reduce the excise duties and let public not face the sudden brunt. This keeps the inflation levels also in check and will help RBI reduce rates further.

c. If the prices are cut along with the crude price, the consumption shoots up! Thus nullifying the fiscal benefits!

7. If the fuel prices are cut drastically, the consumption increases, the vehicle sales increase adding further to the pollution levels. We are seeing what is happening in the capital already! Vehicle sales increase the traffic congestions also!

8. Government is pursuing hard to promote clean energy like the Solar Power, who will spend on Solar Projects if fuel becomes cheaper than water?

These are few points which come to the mind. People criticising for not reducing the fuel prices need to seriously ponder over these points. All numbers mentioned above are approximate.

So where can we expect Sensex to be in this year? No one is god to tell what will happen, but yes, can surely mention some expectations for the year. Everyone is interested in knowing about the Sensex and Nifty index expectations for the year. Taking precedence from previous years let me mention the Sensex level expectations.

Discussing the possible loss first is always better. The worst case scenario for the whole year is in the range of 23300-23000. Not to forget last year’s level 24500 still remains intact, so until that stands we need not fear seeing 23000.

On the upper side Target.1 should be in the range of 29140-29500 and if that’s broken decisively we may test Target.2: 30800-31320. These are targets assuming that GST will not be allowed to be passed in near future. If big bang reforms like GST happen, then we will surely see better times ahead and the views will be written again.

Also track, BSE100 which constitute most large companies. The targets on that can be like this: Target.1: 8950-9050 and Target.2: 9500-9625. Reading Sensex targets along with BSE100 will make more sense this year.

This Article might be Printed in the Investors Digest Magazine of TamilNadu Investors Association (SEBI Recognized)

Disclosure:- It is safe to assume that the author may have interest in the sectors recommended in this news letter. Seeking personal advice from your Financial Advisor is recommended before acting on any of the substance given herein. The numbers, figures, etc., presented may have been taken from various sources.

Happy Investing.

Vivek Karwa

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Few Words on Market…

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by Vivek Karwa, Certified Financial Planner^CM

150525 – Writing this article on the 365th day of the new dispensation at New Delhi. A year has passed since we heard about any major corruption issue at the top level. Many people keep saying that the corruption is still present in the country. Yes, it is present and will continue to be present for long time. The positive thing is, it is atleast not present at the top which was hurting the image of the country past few years. Whoever is heading the government should have a clean image and intentions.

The market has been volatile as expected. The overly ambitious expectations which people were carrying in the minds has tempered down now. We are in a state of economy which is poised to grow, but grow steadily and not due to some booster doses which do not last longer. If India has to grow, the foundation has to be corrected now and which seem to be happening.

Investors, particularly Indian investors still have huge doubts if the country and the market can actually grow in the balance 4 yrs term of this govt. One needs to have faith on the structure of the country and the abilities of the entrepreneurs running both small and large corporations. We have the ability to adjust to any economic condition and laws. And if we can get a clear, firm and government with certain direction, we can do wonders.

World leaders have turned bullish on India. Companies across the world are eager to set up base in the country. Most big, world leaders and CEOs of large companies have already visited India and met the administration. Name a rating agency, and they have already hinted that the country ratings may be improved if the present things improve further. Indian CEOs are turning positive and are ready to give some more time to the demand to pick up.

This will result in the improvement of both prices and participation in the market. Hence, one needs to be patient and remain invested and keep adding as and when the market corrects. Indian investors particularly lose out on the rallies since they enter late. This may repeat this time also. But we the participants in the market need to spread the word that one should start investing at least a portion of their savings to create wealth over a period of time.

SEBI is contemplating increase in the lot sizes of futures contracts in order to curb the participation of small and risk averse retail investors. It is a welcome move. Most of retail investors who lose money in the market is on account of this segment. If one invests for longer term in good quality companies they will surely end up making money and not have to go home with bad memories and heavy heart.

A small investor, rather any investor should always do their homework before entering in the market or the individual companies. Most don’t understand macro and micros and go with herd mentality. Such investors should always go through an adviser or through managed funds like mfs. Risk can be considerable reduced if you know exactly what you are doing.

Understanding every sector is also critical to investing right. As and when the economy picks up, expect the Banking, Capital Goods and Manufacturing companies to do well. These are sectors which have to naturally grow with the economy. One needs to know that when Index goes up it does not mean every stock also should move up. It is not pre 2008. The investors have matured a lot since then.

This Article will be Printed in the Investors Digest Magazine of TamilNadu Investors Association (SEBI Recognized)

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Few Words on Market…

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by Vivek Karwa, Certified Financial Planner^CM

150421 – The parliament session has reconvened after the break and as expected has seen high decibel debates across the board, particularly, on the land ordinance which was re-introduced with fresh life, since the older version had expired before it could be passed in the upper house, in the first half of the session. Farmers are being made the talking and the focus point on this Land Bill.

The arguments of those opposing the land bill lack conviction. They lack substance and no specific point is being pointed out which actually is negative for any stake holder. Let’s be clear on one thing, India needs both development and agricultural progress. Both these have to go hand in hand, both these have to live side by side! One cannot be sacrificed or killed for protecting the other. Hence the land bill is a necessity in our country.

After GST, this is the most watched reform which the world is looking for in India. Companies will come and invest in India only when there is clarity on the land acquisition. Factories cannot be installed in thin air! The government seems serious on this, hence we will have to wait and watch if the same is passed in Rajya Sabha this time or a joint session is called to pass it.

Whichever may be the route, once the land bill is passed we may see fresh FII inflows in the Indian markets. The sentiments may change on the positive. After all ours is the only country which can make money for all. As per the modified calculations, we have already beaten China in growth terms and may soon do it even if you consider the old calculating methodology.

Hence the dips which we are seeing right now should only be used to buy for the long term. Now is the time banks may start doing well again. Banking sector looks good. We may, next quarter onwards start seeing banks report treasury gains. Manufacturing and select Capital Goods sector also looks good. Pharma has seen a correction, the valuations seem still stretched but nothing can be said about this sector since when it goes up it doesn’t bother about valuations.

The Sensex at the current valuations does not look costly. Neither it looks cheap. Since India at present is giving the best growth opportunities, don’t expect to get Sensex cheap. Hence, if one is getting market at fair valuations like the present one, start investing. At least start investing in tranches. If you are a young person and salaried one, start investing a fixed amount in equity markets for long term. This discipline of regular investing can really create wealth for you in next 4 to 9 yrs!

The older people who have all money invested in bank fixed deposits should start looking at debt funds in current scenario. Not all your money, but at least a portion of it should be allocated to the debt funds. These funds, over next 3 yrs have the potential to give few percentage points additional returns over your fds.

Unless and otherwise real bad news flows out of the world, India should stay stable. 26200 could be the worst case scenario for the Indian markets. Only worse geopolitical news can take us there in the present circumstances. The second worst thing which can happen is the crude rising back to 100 mark. That looks difficult but nothing can be predicted in commodities like the crude.

Government needs to sort out the retrospective tax issues which are still pending. Though the finance minister has claimed that no new claims based on the lines of primitive thought process will be raised, the investors willing to invest in India will always be wary until the Vodafone case is shut forever.

Hope this will happen. But as said earlier, Invest for long term, atleast invest monthly and regularly.

This Article will be Printed in the Investors Digest Magazine of TamilNadu Investors Association (SEBI Recognized)

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Few Words on Market…

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by Vivek Karwa, Certified Financial Planner^CM

150324 – Don’t know how many noticed the recent movements in the market. For quite some time, in fact it was many times mentioned, in the previous articles that the Sensex should test the 30006 mark on the higher side. The recent high made on 4/March/2015 was 30025 on Sensex and then we saw a correction. We have seen a low of 28158 till now and market seems to be stabilizing in this area. We should see a good support at 28000 and then another good support at 27800 in the short term, best support comes at 26200 on Sensex.

Markets generally move based on news flow. We had several news events over last 45 days and the situation seem to be drying up now, hence the profit booking. As the old saying goes: buy the rumors sell the news, hence the market is now consolidating, and will look forward to more news.

We started with the Railway Budget and first time since I have started tracking the budget saw No New Trains introduced. The vision was very clear that it makes no sense to just announce new things and then keep them undone. It actually made sense to clear the back log and improve the amenities which the passengers like us actually expects.

As usual the critics criticized the rail budget as a mere piece of vision document. The answer to them lies exactly in what they are saying. The budgets till now actually lacked any kind of vision for the corporation which is used by crores of people daily and employs the highest number of people.

Then came the finance budget, the budget was highly awaited and tracked by everyone, being the new governments first full year budget. Agreed that it’s a people unfriendly budget in the short term but will turn out to be a huge boost in the long run.

Both the rail and the finance budget were first misunderstood by the markets on the first instance. That’s why the markets saw a correction after each budget, then after realizing the hidden agenda in it, the markets gave thumps up. The Sensex and the Nifty movements clearly tells us this thinking!

There are many positives happening now. These things have to start reflecting on the ground. Have a belief that in next 12 – 18 months the Indian economy will be in much stronger position and the same is clearly voiced by all rating agencies. The growth projections have already been raised up by the global rating companies.

The first half of the budget session of the parliament has passed off. The data says it was one of the most productive sessions of the recent history, though there were many attempts to throw the government in to the policy paralysis state which some of us have actually become used to. This sends the signal to the global investors that the Indian politicians mean business (hopefully) and thus many bills are being passed within one session.

The Insurance Bill, Mining Bill and the Coal Bill are the major ones which has attracted the attention of the world. Insurance bill has been wandering around the corridors of the parliament for many years and finally has been disposed off for good. This sector alone is supposed to attract more than 35000 Crs in next 3-5 years.

Investors should gauge all such things with positive outlook and use opportunities to add good quality companies in their portfolios. Sensex hopefully should test the range of 33600 – 35000 in the current year 2015 and to reach those levels support from good quality stocks is pertinent. Happy investing and wish you a profitable new financial year.

This Article will be Printed in the Investors Digest Magazine of TamilNadu Investors Association (SEBI Recognized)

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